We’ve recently started devoting our Tuesday meetings to discussions on economic themes. They just haven’t been getting posted. But no more! Here are Katherine’s notes from our first meeting, on a critique of the Keynesian interpretation of the crisis dominant in liberal circles, by the UK collective Endnotes.
‘Bar-Yuchnei’ (the pseudonym of this article’s author) makes the claim that since WWII, there have been increasingly diminishing returns from each economic boom cycle (with the exception of the ’90s stock market bubble) in the United States and in other ‘advanced countries.’
The author points to the debt-to-GDP ratio as evidence, and states that ‘for almost four decades, debt-to-GDP ratios in the high-income countries have tended to rise during busts (according to the Keynesian prescription), but they have refused to fall or have risen even further during booms… it is because the booms themselves have become increasingly weak, on a cycle by cycle basis.” Due to these weaker and weaker boom cycles, eventually no amount of government spending will get us to a point where everyone can pay off their debt. Laborers will therefore always be indebted to the ‘job creators.’
During the discussion some asked for a description of the Keynesian economic model.
Keynesian theory concentrates on economic ‘boom’ and ‘bust’ cycles. During a boom phase there is increased investment in leading sectors of the economy and production is also increased. This eventually leads to overinvestment and decreasing returns, resulting in panic and pullback by investors and decreased production (bust!). When investors spend less, the government must step in to spend on infrastructure and also lower interest rates to keep the economy afloat until investors regain their confidence in the economy. When investors are ready to spend again, the government raises interest rates so that it can pay off the debts it accrued during the bust cycle.
Again, according to Bar-Yuchnei, the economic booms have been getting less and less profitable over time and back-debt is out of control. This is a problem because people in debt do not want to borrow more money. That means even if ‘the 99%’ received stimulus money directly (i.e. Obama’s ‘middle class’ tax breaks), much of it would go to paying down their debts. There will come a time then, when the economy won’t ‘recover.’
The two contradictory pressures on states that lead to austerity policies:
1. Need for fiscal stimulus to finance infrastructure and the paying down of debts to keep the economy of a country afloat.
2. The pressure a country feels to avoid public spending while indebted (which ultimately risks its sovereignty).
According to Keynesian theory, the goal of a government is to balance these two pressures so that both laborers and ‘job creators’ get their fare share of the pie. However, when a government is asked to provide fiscal stimulus when it is already deeply indebted, there is not much it can do, and a crisis ensues. When this happens, people with resources (individual capitalists) do not suffer as greatly as those without (laborers) because they can usually wait the crisis out. Again, the laborers come out on bottom.
One critique of the article, though, is that it doesn’t even suggest possible solutions. For example, could debt cancellation bypass the problems of debt repayment?
Other limitations of Keynesian economics are that (in its standard formulation) it doesn’t account for 1) population growth and 2) a finite amount of resources.
Even green technology cannot skirt these limitations. The Jevons paradox is the proposition that technological progress that increases the efficiency with which a resource is used, tends to increase (rather than decrease) the rate of consumption of that resource.